Meso-Level Index Insurance in Practice: Sucess Stories and Learnings
Insurance has an important role to play in agricultural risk management borne out of the ever-increasing instances of extreme weather events globally. However, its contribution to risk reduction and resilience depends upon the quality of the insurance tool; and whether it has been designed to respond efficiently to the needs and context of the policyholder or final beneficiaries. This calls for innovative approaches in delivering context-specific insurance products. Meso-level distribution is one such approach that we try to highlight through our ongoing research.
To recap, meso-level distribution provides portfolio or group insurance based on an index to the ‘risk aggregators’ such as financial institutions or agri-businesses: for risk-management purposes. The aggregator is policyholder and direct client of the insurer. For instance, financial institutions, providing insurance products to agri-businesses, can purchase policies to cover default risks arising from major agricultural shocks. Agri-processors can also purchase policies to cover the risk of non-recovery of inputs advanced to contract farmers or insufficient supplies of raw materials due to agricultural shocks. Although meso-level distribution is a relatively novel product, there are a few experiences particularly from Latin America and South Asia that can provide important learnings in design and delivery of insurance products in similar developing country contexts.
In Peru, Global-Ag-Risk, in partnership with COPEME, which is an association of microfinance institutions, wanted to hedge the portfolio risk of member MFIs on agricultural loans using weather index insurance. A primary weather risk in areas of Peru is extreme rainfall and flooding from El Niño. In 2009, a meso-level index insurance product for risk aggregators was approved by the Peruvian regulator and was offered by the Peruvian insurance company La Positiva, with reinsurance from PartnerRE. By insuring the aggregator, i.e. microfinance institutions and reducing their portfolio risk, a meso-level approach enabled the rural poor in the flood areas of Piura, Peru to gain increased access to financial services and credit.
The Loan Portfolio Cover (LPC) offers policies to financial institutions in the Caribbean, more specifically Jamaica, St. Lucia and Grenada — to protect their loan portfolios from extreme climate events and subsequent loan default. Pay-outs were made if previously specified values for wind speed and/or rainfall were exceeded. Multiple local insurance companies served as the insurers for the policy while the reinsurance facility was provided by Munich Re. As loans were insured against extreme weather events, the experience highlighted that investment was able to reach areas previously considered too risky for traditional lending.
Another arrangement of meso-level insurance is to be found in Uruguay where an electricity company, acting as the aggregator, was covered by an index-based weather insurance product. Uruguay is strongly dependent on its hydroelectric plants to supply the country with electricity, making it vulnerable to droughts. Therefore, the state-owned electric company entered into a weather insurance contract with Allianz acting as the insurer and Swiss Re acting as the reinsurance company. Payments are triggered when water levels fall below a critical value. The compensation payments were to be used for purchasing oil as an alternate source of energy to provide the county’s inhabitants with electricity.
In the Philippines, Munich Re offered parametric insurance to protect loan portfolios of cooperatives from events such as hurricanes and typhoons. Currently, this product is offered through CLIMBS Life and General Insurance Cooperative. The CLIMBS Weather Protect product operates at a national level in the Philippines — with CLIMBS acting as primary insurer for the local cooperatives and Munich Re reinsuring the product. The cooperatives receive a predefined percentage of their loan portfolio as pay-out if a parametric trigger for rainfall or wind speed is reached. The cooperatives then use these insurance pay-outs for rebuilding work or replacing livestock or other assets.
Closer to India, a project initiated by Oxfam in Bangladesh in 2013, insured local NGO Manab Mukti Sangstha(MMS), working with community-based organizations and individual households through an index-based flood insurance scheme. The policyholder was MMS, insured by Pragati General Insurance (a local insurer in Bangladesh) and Swiss Re as the reinsurer for this model. The product was designed to protect the low income, vulnerable char communities by improving their ability to cope with flood risks. The total sum insured was approximately BDT 1,328,800 ($15,677), covering 1,661 poor households. The Premium per household was approximately BDT 824 ($9.72), which was attached to various services availed by the households from the NGO. Findings from recent research suggest that in addition to risk mitigation, the introduction of the flood insurance program has resulted in an increase in agricultural productivity among households in the areas covered by the programme.
Another success story of meso-level insurance is from PRAN Foods, the largest agro-processing firm in Bangladesh. PRAN Foods encourages the local supply of Cassava (a non-traditional crop in Bangladesh) through contract farming schemes. It employs small and marginal farmers by leasing out approximately 7,000 acres of land. It purchased meso-level index insurance from Green Delta Insurance Company in 2016. The Global Index Insurance Facility (GIIF) supported Green Delta in development of the product, which protects the Cassava crops from cold spell and excess rain at critical stages of the crop cycle. PRAN purchased the insurance product to cover the value of deliveries expected at harvest for the 100 acres selected for pilot (approx. $13 per acre for a total of $13,000). The company then used these pay-outs to help cover the liquidity needs in case of insufficient local supply due to major weather shock. In case of less-severe shocks, PRAN provided the funds from the payments to farmers as a bonus and to sensitise them about the benefits of insurance.
The overall experiences highlight that meso-level distribution of insurance relies extensively on networks with pre-existing connections to rural households that local aggregators already have access to. These networks provide a comparative advantage for delivering insurance products more efficiently and with greater outreach in low-income and low-literacy contexts.
However, one of the limitations observed through these experiences has been in terms of designing models that will ensure that the ‘risk aggregators’ eventually pass on insurance benefits and pay-outs to the intended beneficiaries (small and marginal farmers). Additionally, several benefits afforded by meso-level insurance are indirect in nature, either through lower interest rates on loans or through expansion in the types of services offered to farmers for instance, that deters the interest of policy makers and donors of development insurance programmes.
In this regard, there is a significant need to highlight the tangible benefits that such products can offer to agricultural households.